Friday March 31, 2017

Amazon and Walmart are at War over Prices and it is Terrifying CPG Brands

Some of America's biggest Consumer Packaged Goods or CPG brands are terrified of the price war that Amazon and Walmart are waging against each other. Both Amazon and Walmart are asking CPG companies to lower prices anyway that they can even if it means cutting marketing budgets. Walmart wants to have the lowest prices on 80% of the products they sell. Even if Amazon is selling a product for a loss, Walmart wants to be able to sell it for the same price, but at a profit. So they are putting extreme pressure on brands that sell in their stores to lower their prices because Amazon has taken a new approach with an algorithm.

Amazon's new algorithm is taking the bulk pricing at Costco for example, and applying it to single item sales. Naturally this is creating a rise in shipping costs and cutting profitability. In exchange for making their products more eCommerce friendly, Amazon is selling CPG companies premium advertising spaces on their Amazon store. This would include creating products that can be shipped affordably and make a profit. Some companies are going the extra mile like Green Works that took their household cleaning products and re-imagined them into a concentrate form. When you order some of their products, you get a concentrate version of the cleaner, instructions on how much water to mix it with, and a bottle to contain the mixture.

Another re-imagining of a product would be the packaging. Typically In a retail store, a product's packaging needs to be large to attract sales, and sturdy to deter thieves. Companies now are making their packaging smaller and lighter to become "frustration free" as Amazon has been doing for years. Again Amazon is rewarding those companies that comply with premium advertising space in exchange for making the cost of shipping less.

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In the end consumers win, but are we ready to purchase powdered soft drinks to cut down on shipping costs? I was wondering why The Clorox Company announced Clorox Bleach Crystals and now I see why. It is amazing to see how Amazon has revolutionized eCommerce in the same manner that bulk packaging revolutionized B&M stores decades ago.

"Once every three or four years, Walmart tells you to take the money you’re spending on [marketing] initiatives and invest it in lower prices," said Jason Goldberg, the head of the commerce practice at SapientRazorfish, a digital agency that works with large brands and retailers. "They sweep all the chips off the table and drill you down on price."

But this time around, Walmart’s renewed focus on its "Everyday Low Price" promise coincides with Amazon’s increased aggressiveness in its own pricing of the packaged goods that are found on supermarket shelves and are core to Walmart’s success, industry executives and consultants say.

The result in recent months has been a high-stakes race to the bottom between Walmart and Amazon that seems great for shoppers, but has consumer packaged goods brands feeling the pressure.